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Recent headlines have highlighted the shift many investors are making from large-cap to small cap stocks. For the better part of the past two decades, investing in mega-cap growth stocks has been a trade that's paid off. We've seen the stark outperformance of the so-called "Magnificent 7" in recent years, and there are many structural and fundamental reasons for this. In most cases, these companies have higher growth rates than many smaller counterparts, with much greater size and scale. That can translate into better returns for relatively lower risk, and that's what most investors are after at the end of the day.
That said, a number of talking heads have started to notice that this current market shift is starting to extend beyond a small-cap rally. We could be on the cusp of what some are calling a “great broadening,” where large cap stocks are losing their hold of their respective sectors. And while institutional investors typically hold a broad array of stocks (including small caps), it's also true that higher-quality names are likely to be the focus, no matter what market capitalization group one assesses.
In that regard, let's dive into three small-cap stocks institutional investors appear to be gravitating towards that may have the potential to outperform the Magnificent 7 over what could be an impending recession. Indeed, if recessionary forces hit, holding a diversified portfolio of holdings may pay off. In my view, these are three of the small cap options that are worth considering right now.
Key Points About This Article:
- A rotation away from large-cap stocks and into smaller-cap names is building in the market as institutional capital looks to rotate into more favorable areas of the market.
- These three small-cap stocks look well-positioned to suck up some of the institutional capital that may be looking for a home at this point in the cycle.
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Geo Group (GEO)
Image of an empty prison cell
First off the list is small-cap company GEO Group ( NYSE:GEO ) with a $2 billion market cap. The company operates private prisons and facilities across the world. Although its shares price saw a 60% gain in 2023 and rose 24% this year, analyst still see it as a Strong Buy . Despite investor Michael Burry sold his stake last year, GEO Group continues to attract positive analyst attention.
GEO shares saw a rise of 9.4% in July 15 due to high trading volume. In the same month, the stock gained over 22.2% due to the potential Trump re-election that can benefit many sectors. The company predicts its quarterly earnings of $0.26 per share, showing am 8.3% increase year-over-year. Revenues are also estimated to reach $606.76 million.
Insights of earnings and revenue projections help investors in deciding which stocks to own. For Geo Group projections , the EPS estimate has remained stable over the past 30 days. Typically, a stock's price doesn’t continue rising without changes in earnings estimates. Monitoring GEO's performance will be crucial to determine if its recent gains can lead to sustained strength.
Paysign (PAYS)
Image of a city connected by a grid
Paysign (NASDAQ:PAYS) is a digital banking and technology company covering a range of diverse sectors. The company offers prepaid card programs, patient affordability solutions, digital banking, and integrated payment processing. Considered a cross between a technology and fintech play, PAYS stock is one that certainly provides some relatively attractive growth potential over the long-term. But trading at just 30-times earnings , it's clear that this is a company that many in the market don't view in the same way as other much more high-priced fintech stocks are valued presently.
Importantly, Paysign reported strong Q2 2024 results , with revenue up 30% to $14.3 million and adjusted EBITDA surging 96% to $2.24 million. The company's patient affordability segment drove a 267% revenue increase, contributing 59% to overall growth. The company remains optimistic about future growth and operational cash flow growth, which should drive continued fundamental strength.
Being the biggest provider of prepaid card and payment solutions, Paysign saw a 30% increase in its Q1 2024 revenue , surpassing estimates. Net income also reached $309,000 from 2023’s loss. The company is clearly benefiting from the digital payments trend and increased healthcare spending, notably seeing patient affordability revenue soar 305% year-over-year.
Paysign's versatility may continue to attract key clients, though the stock remains speculative at current levels. That said, analysts rate the stock a strong buy with a 21% upside potential, anticipating further growth with interest rate cuts and rising transaction volumes.
Summit Therapeutics (SMMT)
Image of a vial being filled in a laboratory environment
Summit Therapeutics (NASDAQ:SMMT) hit a 52-week high of $11.74, marking a 444.81% increase over the past year. This surge highlights strong investor confidence and the company's progress, particularly with its key drug ivonescimab. Financial firms Citi and Stifel have both raised their price targets— Citi to $13.00 and Stifel to $14.00 —due to promising clinical trial data and anticipated results from the Phase 3 HARMONi-2 trial.
The company’s ivonescimab showed strong results in the HARMONi-2 trial for lung cancer. Summit also recently restructured its board, appointed a new auditor, and ended Q1 2024 with $157 million in cash. Plans are underway to expand ivonescimab’s Phase 3 trials and explore further innovations.
Notably, the company took on a capital raise, bringing in $200 million by issuing 22.2 million shares, boosting its funds to $357 million. Despite a Q1 loss of $34 million and no revenue, SMMT stock surged 196% in 2024 and remains a stock I think could have big upside, if its key drugs do gain approval and hit the market as expected. Again, this is a more speculative bet on valuations growing in the biotech space once again. But if this sector catches fire, this is an overlooked stock to consider right now.
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